WaFd Inc (WAFD) 2005 Q4 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the First Mutual Bancshares year end 2005 conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, Wednesday, 25 January 2006. I would now like to turn the conference over to Mr. John Valaas, President and CEO of First Mutual Bancshares. Please go ahead, sir.

Good morning everybody. Also with me today I have Roger Mandery, our Chief Financial Officer, Scott Harlan, Executive Vice President and head of residential consumer lending, and [Charles Smith], financial analyst at the bank. I'll begin by reading our forward-looking statements disclaimer. This presentation may include some statements regarding the Company's trends, objectives, anticipated growth, credit quality, and other expectations which will be forward-looking statements for the purposes of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from those expressed or implied in this presentation.

Additional information concerning the risks and uncertainties are discussed from time to time in filings made by the Company with the Securities and Exchange Commission. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company does not have any obligation to update any such forward-looking statements.

Good morning again. I will make a few brief comments and open up to questions. We're very pleased. We had a very, as the cliche goes, a very solid quarter, a very good quarter. Q4 earnings per share were up 13% over Q4 a year ago. The year's earnings per share were up 11%. Margin expansion of about 15 basis points sequentially from Q3 to 4.18% and credit quality is -- remains absolutely pristine.

Non-performing assets are at 8 basis points. I would point out about half of those NPAs are insured loans that are subject to insurance coverage -- consumer loans subject to insurance coverage, so very, very, very good credit quality.

Just some comments on the economy here. The economy here really looks very, very good. And talking to business banking customers, their order books, their backlogs if they're contractors or whatever, are solid through 2006 into 2007. If you look at the multifamily scene here, rents are finally starting to firm after several years of softness. Boeing is hiring. They will never be back to levels they were in the late '90s, but they are hiring high paid employees -- people in engineering and drafting side.

Microsoft continues to indicate its plans to expand. Their headquarters, as many of you know, are just about 10 miles away from us in Redmond. We're in Bellevue. And they just recently announced the purchase of all of the Safeco buildings except for a data center in here in Redmond for $209 million to support their future growth. That Safeco campus was immediately adjacent to the Microsoft campus.

For those of you who have followed the class A office market in Bellevue, you may recall several years ago that we had class A vacancies of around 30%. That's now below 10% and office space -- class A space in particular in Bellevue is becoming very, very hard to find. So all indications are that the economy here is looking very good. Again, a very good quarter for First Mutual, and at this point I will turn it over to questions. Michael?

(OPERATOR INSTRUCTIONS). Matthew Clark, Keefe Bruyette & Woods.

Good quarter. Just a couple of quick questions. You talk about the -- how you -- is your adjustable-rate loan portfolio, just some year end pricing, I guess we haven't really seen it obviously in the average yields. I'm just wondering what kind of magnitude that could have in the first quarter. And obviously there's probably some offsetting that's going to occur on the CD side, but just kind of trying to frame that out a little bit better.

Good morning Matt. This is Roger. I think in terms of the first quarter, we're looking for the margin maybe to drop-down two or three basis points. It was 4.18 in fourth quarter and I think we are looking for something in the 4.10 to 4.15 range. John was pointing something out, but I think we expect our assets to re-price in a fairly systematic matter or manner, much like we've seen throughout the year because they're tied to the indexes. So we have a pretty good idea of what is going to happen.

The wild-card is on the liability side, particularly on the deposit side. In fourth quarter, we were able to sort of hold the line on any pricing increases in our core deposits and to avoid promotional pricing on our time deposits. We're not quite as optimistic that we'll be able to continue that process in first quarter, so we look for a little bit of degradation on our cost of funds there. So we would look for the margin to actually squeeze down just a little bit.

Okay. And then can you just touch on some of the expenses? There appear to be -- maybe you could just frame out the -- I know the expense run rate is supposed to drop back down to the 7.3, but -- and I guess I am probably answering my own question, but can you just touch on the depreciation uptick? And I guess -- I assume that is sustainable going for given that you probably have to expense that over the life of the space and so forth?

Yes, we had a number of banking centers that were remodeled in 2005 as well as the corporate office here. And during the remodel process, none of the depreciation expense hit the books until the remodel is complete. And the timing on all of the remodeling hit the fourth quarter, so we pretty much saw the full depreciation expense in that quarter and we would expect it to be just about that same run rate in first quarter.

Louis Feldman, Hoefer & Arnett.

A follow-up on that -- on my colleague's question, what percentage of the loans re-priced in the fourth quarter?

About one-fourth of all loans. (multiple speakers) Roughly --

So it is spread out fairly evenly?

Yes, the only exception are the prime based loans which are about 18% and --

Which re-priced a couple of days later?

Yes exactly.

Something you noted in there was the increased fees from late payments. Have you taken a look at whether this represents a potential risk on defaults for the consumer portfolio, given the fact that these fees are increasing? There seem to be more and more -- what you were implying, I felt, in the MD&A was that the number of late payments was increasing, which would be beneficial from that standpoint. But have you stress tested the portfolio for whether this is a precursor to some much more serious credit issues on this portfolio?

This is Scott. I am going to give you a slightly different answer than you're expecting here. The -- up until about two years ago, we were -- even though our loan documents allowed for a more aggressive collection of late charges in terms of both the timing -- number of days late after our payment is due. And the actual percentage of the payment that and due as their late charge, even though the documents allowed for a little more aggressive collection than what we're doing, as a practice, we had established sort of one standard nationally. And about two years ago, we made a decision to go back and start implementing those on the system -- on a state-by-state basis for all new loans going on the system.

So the increase there is due to the fact that old loans are paying off at (indiscernible) less -- or I guess on more liberal late payment terms and more loans are now on the books with a less liberal payment term. So kind of a convoluted answer, but it's kind of a good story.

Okay. Well that of course begs the question, are there any states, any regions where you're seeing a higher level of late payments coming in?

Higher than in the past? No. Higher than certainly -- and the tables kind of point out, certainly the delinquency on the entire portfolio hit a level about three quarters ago -- two, three quarters ago (technical difficulty) plateaued at, but regionally from region to region, no. It's about what we've seen in the past, as relative to other regions.

Okay, so you are not concerned?

The -- again, the level of delinquency is higher than I would like it to be, but it is not continuing to increase. For the last two quarters it's been -- or last [third] quarter now it's been essentially the same level.

Since you instituted the new underwriting policies?

Yes sir.

This is Roger. I would just also add that the consumer portfolio has increased in size and you would expect late charges to move somewhat in tandem with that process.

Jim Bradshaw, D.A. Davidson.

Good morning. Roger, the share account wasn't down as much as I assumed. And were there more -- can you talk -- it is probably option issuances, but just wondered what your thinking was. And the buyback is all done right?

Yes, the buyback has been completed. And you are right, the actual share count didn't move very much because of some options that were exercised in the fourth quarter.

Okay, but -- and the buyback was done in the middle of December roughly, so the average share count should still come down a little bit in Q1? Average diluted share account?

Yes, the buyback was completed in November, so the actual share count in fourth quarter ought to be awfully close to what we saw in fourth quarter. We should see roughly that same number in first quarter. There'll probably be some routine options exercised in first quarter, so there's always a little bit of increase in share count as we go along, but I wouldn't expect anything dramatic to happen in first quarter in comparison to fourth quarter.

Okay good. Second question I had was maybe you could talk about the bankruptcy filing pace. We've heard a lot about how heavy it was in October, but just wonder now that January is basically done, did it fall way off in December and January month to date?

Hi this is Scott. The answer is yes. The -- after obviously the -- I think the deadline was October 18th, and there was certainly an echo affect after that where as the different courts process the paperwork, we got notifications well into early or mid-November. But after that, we have seen a significant decrease. And whether that is just a short term timing issue because everybody that was going to file did file, or whether -- or how much of that is due to the actual benefits of the changes in the law, obviously we have no way of knowing at this point. But there was definitely a pig and a python kind of effect right through the end of October.

But you're not in a camp where you think it probably cannibalized a little bit of the loss -- bankruptcy filing rate in 2006 to -- with that big spike in the October month?

Absolutely -- without a doubt, absolutely. There is no other way to explain what happened in October. And people were rushing into the bankruptcy attorneys.

Last one for me is, it looks like income property loans are down about 10% roughly from the March quarter to December quarter. How much of that is related -- or maybe you can break -- give me a rough guess -- it is about a $30 million drop I think. How much of that is related to sales or payoffs or competitive losses?

Jim, this is John. The big driver has been payoffs. And as you know and you probably heard from other financial institutions with the yield curve shaped like it is, if you are active in the commercial real estate market you got a lot of customers who are finding a ten-year fixed rate a very attractive product, and that's typically not something that we portfolio. So payoffs due to that, very aggressive pricing in the income property market particularly in multifamily as well. And to some extent, we've been less aggressive in putting that product on the books at today's cap rates, today's pricing and today's structures.

Since we're about a year into it and the ten-year has been low for a long time now, you think the refi piece of that has probably slowed down to pretty close to nothing here?

I wouldn't characterize it as pretty close to nothing, but I am -- this is a real forward-looking statement. I am anticipating that activity will slow down because many who would have been economically [incentive] to prepay in switch to a ten-year fixed have done so.

Well I am holding you to that, so --

That was actually Roger who said that.

The last question I had was about -- you mentioned in the press release legal fees increased related to a problem loan. Is that -- can you delve into a little bit more -- a single problem loan or a basket or what was the nature of the increase there?

I will respond initially and I'll let Roger go into little more detail, but there were a couple of problem loans. And quite honestly, and rationally, you should never do this, but in a couple of cases, in my view they are matters of principle. And we will continue to spend on a matter of principle to make a point in which I believe principle is involved. I feel strongly about that, so that accounts for some of that expense. Roger do you want to add anything?

I was just going to add that it did involve a basket of loans. Some of them were consumer loans and they've since been charged off. One involved -- in the residential area and that probably will have a little more legal fees going forward, but we don't expect the level of legal costs that we saw in fourth quarter to -- we don't expect to see that first quarter or perhaps even any of the future quarters in 2006.

I appreciate it. Thanks very much.

Bill Dezellem, Tieton Capital Management.

Thank you. We had a couple of questions. First of all, relative to the competitive environment, would you please give us an update as to what changes or lack thereof that you have seen?

On the deposit side, and certainly we commented in the press release that complication at the retail level for deposits has been fairly intense. We have, in addition, two new banks on the landscape here in Bellevue that opened last year, so a couple of more competitors in the local market on retail deposit side. But generally, among community banks, fairly intense competition on the deposit side.

On the lending side, of course there's always competition. Nothing extraordinary there, but it's an interesting to see the level of competition for retail deposits in particular. Do you want to add anything? Does that address your question?

It does to some degree, and I guess the competition --

Wishy-washy enough for you?

(multiple speakers) has been stiff for a period of time. Are you seeing it get any worse or any better, or is it really just continuing more of the same?

I would just characterize it as more of the same.

Thank you. And secondarily, the noninterest expense came in a bit higher than you were expecting, and you walk through in the release why that was the case or what caused it to be a bit higher. But I am going to ask what was it out of those factors that you did not see three months ago when you are looking into the quarter that surprised you?

I will let Roger respond in some detail, but -- excuse me, I'm losing my voice, but let me just make the observation that in the -- in looking at noninterest expense and the efficiency ratio in particular, you need to keep in mind that we have the expenses for credit insurance which went up quite substantially. And I think in the fourth quarter, Roger, those amounted to about [390] basis points or so in our efficiency ratio. So you have that as a big piece of it. We talked about legal expenses which went up quite substantially, and again, as Roger suggested in the last question that we don't anticipate those -- on the legal expenses on the loan collection side to be running quite as high in the future as they did in the fourth quarter. Roger, anything you want add?

Bill, I would just (technical difficulty) that we fully expected some of the increases in compensation in some of the areas you would normally expect. But we were a little bit surprised with the occupancy costs, which jumped a lot on a quarter to quarter basis. And the depreciation associated with all of those remodels finally hit the bottom line. And quite frankly, I was expecting that possibly to fall into first quarter or spread between fourth in first quarter. And the good news is that those remodels were completed in a timely fashion and so we were done with them, and so therefore we started depreciation process.

The other thing that was a little bit of a surprise was that we did have some issues with an impaired loan that -- we only have one and I think we discussed in the third quarter release, but there was some extra legal costs that were unexpected on that particular loan. And then we had a few costs associated with all of the bankruptcies and stuff that Scott mentioned and associated again with the sales finance loans. So we -- it was an unexpected cost and we did not anticipate it when we were putting together our forecast for the fourth quarter.

I might just add something to give you a little bit of view into 2006 on the occupancy and depreciation side. We don't have any new facilities or remodel facilities coming on-line in 2006 until -- we expect the very end of the year sometime in the fourth quarter we're waiting for permitting on a 13th banking center location, but wouldn't expect that to be finished until sometime in the fourth quarter.

Thank you. And then, if we roll the clock back one or two years, you all had increased your marketing expenses really with the intention of trying to increase the exposure and name awareness of First Mutual Bank. And with the benefit of hindsight and getting to see the current level of awareness, how would you characterize those efforts and are you doing anything differently today?

We don't have any formal [mayors] for name recognition other than (technical difficulty) some customer surveys that we did a couple of years ago at the start -- at the outset of these expenditures. But anecdotally, I would say that our brand recognition has improved noticeably in this marketplace, particularly on [Eastside]. It's one of those things that is a little -- unless you actually -- unless you go out and do surveys periodically, that you can't point to any strict measures. But we do feel that anecdotally we've got some increased brand recognition. We do not anticipate significant increases in marketing expenditures in 2006.

Great. Thank you both.

Sara Hasan, McAdams Wright Ragen.

You didn't mention option expensing and what the impact will be for 2006.

Roger would be glad to.

Good question. We're anticipating that probably option expense will run around $0.07 a quarter -- I'm sorry, $0.07 a share.

I was going to say, that is quite a bit. For the year?

Pardon?

For the year?

Yes, for the year. And I think that probably compares to something around to $0.05 or $0.06 per share for 2005.

Okay. Thank you. And then can you talk about your prepayment fees in terms of the types of loans you are seeing them on?

This is Charles. The prepayment fees are coming primarily from residential and income property, permanent mortgages. The residential loans tend to be fairly steady each month. In terms of the prepayment fees that we see coming from those, income property tends to be more unpredictable in its nature, but the prepayment account fees on those tend to be significant when they occur.

And are you still expecting them to kind of trail off with rates continuing to rise?

Well, the kind of theoretical point on that is that given how long we've been seeing the movements in rates with the long-term rates staying where they are and short-term rates rising, one would have thought that we would have seen all the prepayment activity we were going to see sometime ago. But it continues on, and since we can't really predict what is going to happen with rates or what might be going through the minds of borrowers, we don't know if it's likely to continue or if it does, how long it's likely to continue.

Fair enough.

This is Roger. I would just add, if you go back in our press releases for a few years, each and every quarter we thought we'd seen the end of the windfall from the prepayment fees. And then we were pleasantly surprised and this is [repeating] quarter, so we're a little gun-shy about trying to predict that anymore. But we're a little more confident that maybe we'll see it for another quarter or two, but beyond that, somewhere in here, our good fortune is bound to change and we'll just have less of prepayment fees, particularly in the -- -- excuse me, we think in particular, the commercial area.

Great. Thank you.

Porter Robinson, FTN Financial.

Just a couple of quick questions. Looking at your comments about loan growth and I guess the portfolio, where do you see your non-residential, more C&I business banking efforts going in 2006?

Well we would like to see that become an increasing portion of the portfolio. Certainly if you look out over the next few years, what is it, 12 or 13% of the portfolio today? At the end of the year we would like to see that more in the 25 to 30% range. But it's a piece of the portfolio that you want to grow at a fairly measured pace, so I don't see a dramatic change in the next few quarters.

Have you gone out, John, and hired new commercial bankers for that effort?

We haven't had any new lending staff in the last year or so. We believe we have still got capacity there.

Okay. I guess my last question concerning your loan sales, I noticed that you talk about potentially selling some more commercial and residential loans going forward. Do you see that being just sort of a quarter by quarter decision based on how the portfolio grows?

In part it's going to be a quarter by quarter decision, but in part it's going to be to manage levels of exposure in certain segments of the portfolio that we have, and in part to manage -- for example, in the commercial real estate area, to accommodate clients. And given market conditions, particularly in the pricing area, we may be selling loans that don't bring us the sort of return that we want to our portfolio. But other lenders are interested in buying pieces of those, so that will drive some of that as well.

Okay sounds good. Thank you guys.

[Wayne Goldstein], [Endicott].

Thank you for another great quarter. I've come so low on the queue that almost all of my questions were answered. So I'm going to serve two up to you. One is that I noticed no forward-looking statement about the Superbowl. I'm curious about that. But more importantly, on the home improvement business, what should we be thinking about as far as storms go? The Southeast experienced tremendous hurricanes, three in particular, and the west coast had I think some unusual rain this year. And what is the impact on that business?

This is Scott. Over the last year and a half, as the different hurricanes attacked the Southeast, we would -- with each of them, we would go through and we would plot the location of all of our loans, look at our different levels of exposure in each of those areas. As you can imagine, when you're doing lots of relatively small loans across a broad geographic area, you don't end up with a intense level of concentration in anyone particular area and that tends to be the case as we -- as these -- in the states the hurricanes came in.

And I can just say we have had a handful of experiences -- calls, situations over the last year and a half where customers have called and said they've had some damage, but it has not been anywhere near the level of activity that we would have expected given what we see on the news and those sorts of things. So -- and there haven't been any that I know of -- any impact from the drenching that the west coast has taken over the last month or so. So it's really primarily -- the only thing that we have heard about directly -- direct experience has been the hurricanes in the Florida and the Southeast.

If you were to turn around the other way from an origination standpoint, is there either a positive or negative? I could see all the insurance money that's going to move down there possibly taking away. On the other hand you could see people financing things early with you and then repaying that with insurance money.

Yes, it tends to be a bit of a negative in that when a hurricane -- really, we're talking about a strong hurricane -- gets into an area where there's a lot of damage, every single licensed contractor in that area is busy with insurance work for several months after the event. So they get away from their core business of selling new windows or roofing or that sort of thing, so -- where it would be financed. So we do see that effect somewhat, but it doesn't last too long.

Okay, what about the Superbowl?

We want the Seahawks to go in thinking they're underdogs by about 3.5 points. We like that mentality.

Louis Feldman.

I was just thinking that along Wayne's comments, we have come along way in about 12 calls from questions with Lou. A couple of things. You're stating that you're GAAPed slightly negatively. Given the deposits issues that you have been having, are you -- what are you doing to rectify that situation or at least try to get to a more neutral position? And second, can you -- other than the insurance, can you quantify the difference between the 95 loans that are covered by the insurance and the 17 that are not? On the NPLs.

This is Charles. I will go ahead and answer the GAAP question first. At the present time, the GAAP ratio is indicating a [high] liability (technical difficulty) but basically just on account of the limitations that are inherent in a GAAP report, we don't look at that as being -- or being particularly insightful into our interest rate risk position. We rely much more heavily on simulation models that are really taking cash flows into account in both a short-term and a longer-term perspective.

Using those models, looking at one year earnings going out, we have a virtually neutral to just very slightly asset-sensitive position. And looking out longer-term, again we're at an almost perfectly balanced position, so think it's really just a consequence of limitations inherent to GAAP analysis that kind of make it look that way. So were not really doing anything to try and moved the GAAP. We're basically relying on what we consider to be a superior measure to make sure (technical difficulty) risk position is balanced and where we want to be.

Lou, this is Roger. Let me just add on a footnote here to Charles' comment. If rates were to rise 200 basis points over the next year, just looking into first quarter, the positive impact -- and it's all theoretical obviously, would be about $28,000 after-tax. So virtually nothing. The bigger risk for us would be if rates were to fall as we run the simulation, and if rates were to fall a couple hundred basis points, the impact on a quarter would be negative about 112,000 after-tax. So from a net interest income point of view, it doesn't appear as if rising or falling interest rates would be a great risk to us right now.

Lou, this is John. The second part of your question, I don't want to sound flippant, but basically the difference between the 95 loans and the 70 consumer loans, they're just kind of an aggregate of consumer loans, the 95 happen to be insured and 17 are not, unless Scott wants to add anything.

No, the detail here I think seems pretty consistent with prior quarters. I am not sure that answers your question or not.

Okay. I will circle back around in a different direction then. John, can you comment on what you are seeing -- you talked about this in past quarters on the CRE -- certainly on the income property about the very low cap rates. Now a couple of your peers have talked about cap rates coming back up. Are you seeing that at all in -- on the Eastside or do they continue -- is there very strong continued pressure from the competition?

Well, of course cap rates are driven by what people are willing to pay in the market for a property. And I wouldn't say that we have seen them start to come back up at all. On the other hand, in terms of anecdotal evidence, what I am hearing from our loan officers, I'm not seeing any further declines. I think that the bottom was probably reached, and a story I heard in the -- I think it was the fourth quarter when the loan officers asked to look at a multifamily property here in Capital Hill in Seattle at a 3.5% cap rate.

Okay. And then just one last one, in terms of credit quality, given its pristine nature and everyone seems to be incredibly clean, what are you looking for? What are you most worried about on the credit side at this point in time?

Well, I think there's always the concern -- we have been in a low rate environment for so -- and I am just talking generally about the market as a whole, we have been in such a low rate environment for an extended period of time, that you have a lot of loans across the spectrum. Whether it's residential or commercial real estate or indeed in term loans to businesses that have put on relatively low rates. And the big question is if short-term rates were to continue to rise, how stressed would those borrowers be?

I think the counter to that to some extent is that you had so many borrowers go out as we talked earlier to the longer maturities fixed rates for 5, 7, and 10 years, that they protected themselves somewhat against rate shock. But I think that issue is always out there.

On the residential side you have the concerns about the market as a whole in customers who have been on interest-only loans or the option ARMs and things like that. You're starting to see stories about those starting to come up to their adjustment period, so what are those going to do? What are those borrowers going to do? And if they start to sell their houses, what impact is that going to have on the market? I remain reasonably optimistic about the marketplace here, but it's an unknown.

I also am not anticipating that short-term rates -- personally am not anticipating -- here's another big forward looking statement, personally not anticipating any short-term rates are going to go up a lot more, so we may be protected from some of those payments shock risks, other than people who have been on these IOs and option ARMs and things like that who may start to have to pay the piper soon.

So I need to hold Roger accountable for that statement too?

As you like.

What are you stress testing at this point in time? Can you talk about the -- I guess what I was looking for is what areas are you stress testing more than any others?

Well, we are stress testing the commercial real estate portfolio (technical difficulty) in terms of rate shock. But we haven't discussed the results of those stress tests publicly, but we do stress test that portfolio.

Joe Gladue, Cohen Brothers.

A little bit of a follow-up to those Lou's question there. Regarding the sales finance loans, just sort of wondering about their -- where they fit in -- you've gotten through the bankruptcy bulge in last year, but a few other things on the horizon with credit card companies having to increase minimum payments and such. Just wondering exactly where on the spectrum sort of the sales finance loans fit in with people (technical difficulty) -- people protecting their home mortgages the most, and I guess will be more likely to fall behind on credit cards and such, where do their home finance -- sales finance loans sort of fit in on that spectrum?

This is Scott. I don't know that I have all that satisfying of an answer for you. Not because of trying to be coy, but honestly I just don't see any significant change in the way that product is situated with -- both within the bank's overall portfolio, but also on our expectations for any real serious changes.

On the positive side, and I'm a glass half full kind of person, but I am hopeful that the changes to the bankruptcy law will eliminate certainly a number of the situations where we had people who were perfectly able to make their payments but just walked away. That is something we're hopeful on and we don't -- we won't know that for probably a year or two whether that is going to kick in or not.

In a relatively stable interest rate environment going forward where there seems to be a reasonable level of consumer spending in the economy, that's really what kind of drives our business, and that's -- we're not seeing any serious change on that one way or the other. It seems to be a good, positive flow of applications on a daily and monthly basis. I sense I probably haven't answered your question though, so maybe if you have a follow up on that.

I might just add to that too, if you accept that credit stores reflect -- that is the lower credit scores reflect people who probably are more apt to be affected, for example, by the change in the minimum credit card payments that are coming up or being instituted now, if you accept that and keep in mind that we have credit insurance on borrowers with credit scores below 720, from that point of view, to the extent that there might be an impact there that we think we have credit insurance coverage for some of that, anyway.

Okay. And I guess also wondering about sort of the sensitivity of that business to certain overall macroeconomic factors. Those are -- and this is pretty hypothetical, but there have been market (technical difficulty) dropped 20%. Would that have -- how would that affect the sales finance loans? And on the other side, is -- where do interest rates go and what particular maturity in interest rates would really put a damper on that business?

Speaking strictly theoretically, because we've been doing this business for eight years and I don't know that we have been through all the cycles, but it's certainly our sense that we are actually the beneficiary in the longer run of slower home sales out there, because once homeowners tend to be in the home they think they're going to be in for a few years, then they tend to put the money into improvements instead of just moving on to something else.

And there was a second part your question and I -- (multiple speakers) macroeconomic factors, this probably is not a macroeconomic factor, but will say one thing that drives our business more than anything is the competition out there. And we have -- several years ago competitors were leaving the market left and right, we were able to take advantage of that. That situation has reversed itself now (technical difficulty) with the good economy and we got some good competition out there that are doing a good job of competing. And we've -- and we have to be better at what we do to be able to compete against that competition.

Okay. And is there particular level of interest rates that really slows that business down, do you think?

I don't -- I can't give you any color on that because I've been -- the entire time that I have been doing this business, rates have been essentially where they are now, so I haven't done this business in a 10% rate environment so could not honestly tell you.

This is Roger. I would just add that the average weight -- weighted yield on these loans is roughly 10.6%. So I don't think this particular segment of the consumer is real rate sensitive. So I'm not sure that the movement in rates would make much difference. I think it's more of an impulse buy when they're deciding to get new siding or windows or that sort of thing, and -- which probably also explains why we have a high prepayment rate of between 30 and 40%. (technical difficulty) As they start to look around after they have done a deal with us and decide maybe they can find a little better financing with a home equity loan or something like that.

So again, I think we're an impulse buy. They're not quite as rate sensitive as people might be if they're looking at home loans and that sort of thing. So -- very good solid business line for us and our expectation I think would be that although things will change, we would still expect this business line to continue to be a part of what we're doing here and hit our minimum profit goals here.

(OPERATOR INSTRUCTIONS). Matthew Clark.

Quickly, wondered if you had seen the commercial real estate guidance from the regulators -- it's preliminary, but it was out earlier this month. And wondered -- whether or not you saw it or not, but wondered what your definition of owner-occupied is and what percent of your portfolio using that definition is owner-occupied, just because the guidance differentiates between the two relative to capital levels.

Matthew, I don't have that number in front of me, but it's not a big number in terms of owner occupied.

And your definition typically? Because I'm sure it differs among managements.

More than 50%.

Management, there are no further questions. Please continue with any closing comments.

Thank you all for dialing in. Again, we thought was an excellent quarter and we look forward to talking to you in the future. Have a good day. Bye.

Thank you. Ladies and gentlemen, this does conclude the First Mutual Bancshares year end 2005 conference call. If you would like to listen to a replay of today's conference in its entirety, you may do so by dialing 800-405-2236 or 303-590-3000 using the access code 1104-9602. (Repeats numbers.) You may now disconnect. Thank you for using AT&T teleconferencing and have a very pleasant day.